Last time, we discussed in-depth pros and cons for a 15-year fixed home mortgage. In summary, 15-year loans can save you thousands in the long term but cost more in the form of higher monthly payments. For those with the ability to pour a significant income portion into home equity, 15-year loans are great investments. However, most people (again, ~90%) go with 30-year fixed loans.
Why might that be? Let’s dig into the pros and cons of a longer loan term.
Pros of a 30-Year Fixed Loan:
Lower monthly payments: Contrasted with its 15-year counterpart, a 30-year fixed loan has significantly lower monthly payments: in a $200,000 loan example, the 15-year term at 3.125% interest would cost ~$1,400 / month, while the 30-year loan at 3.5% would cost just ~$900 / month. Paying off a home quickly may be smart, but if you can’t pay your monthly bills, what’s the point?
More investment / emergency funds: With more month-to-month cash available (per our last bullet point), you’ll be able to invest, or prepare for unfortunate circumstances. For example, you could invest in a 401k, or stash a percentage of your paycheck away in case of a health emergency, job loss, etc.
“More house”: As mentioned in our previous breakdown, for the same monthly rate - say, $1,000 / month - a 30-year loan could support a higher loan amount, and thus a bigger, better house. This really sweetens the deal for a 30-year loan.
It’s easier to qualify: If your debt-to-income ratio does not qualify you for a 15-year loan, you might still get by with a 30-year. For a 30-year fixed, the qualifications are less strict.
“Jumping ship”: If you’re planning on living in your home for a shorter time frame (say, 8 years or less), a 30-year loan might make more financial sense. With lower monthly payments, you’ll pay less out in short term interest than in a 15-year. Then, if you want to sell your home / pay off the loan, you’ll be better off.
But of course, there are cons to consider...
The lump sum (again): Our $200k loan example results in lifetime loan payments of ~$250,000 for the 15-year loan, and $323,000 for the 30-year. Again, that’s close to $100k difference! It comes down to the lender making the investment worth their while. If you can’t commit to paying off your loan quickly, you’ll lose much more money in the long run.
More time in debt: In addition to building slower equity in a 30-year, you’re also committing yourself to debt for twice as long. Any plans for having a fixed income source, buying another home, then renting out the first paid-off house won’t be feasible for quite a while.
More fees: Those “loan level price adjustments” that Fannie Mae / Freddie Mac waive in 15-year loan will not be waived here: 30-year fixed loans might become more expensive with added costs for having a low credit score, or a small down payment ability.
Harder to refinance: Compared to refinancing after several years in a 15-year loan, doing it in a 30-year could be tough; the lower loan-to-value ratio you’ve paid off won’t be as compelling to potential lenders. If rates drop to all-time-lows, you might still want to refinance, it will just be more difficult…
The conclusion you should draw from both articles (15 and 30-year) is that there is no right or wrong here. What loan term you should select comes down to your financial priorities, what payments you can support, and what you qualify for. To see if a home finance could benefit you today, head over to our website to receive a quote.
Prospect Financial Group
948 Garnet Avenue
San Diego, CA 92109
NMLS: 349089 | BRE: 01837707
Jason Vondrak has been in the mortgage industry since 2004 and co-founded the mortgage brokerage Prospect Financial Group in 2006 in San Diego, California. Today he serves as President and CEO of Prospect Financial Group and the president and founder of Prospect Property Group, a real estate development company, established in 2012.
"I've had the privilege to serve in an industry that exists to ensure homeownership remains among the top priorities of government and citizens alike. Over the years, it has been a pleasure working alongside homeowners, real estate professionals, and business associates combining efforts and teaming up to help homeowners realize the dream of home ownership."
We've been helping customers afford the home of their dreams for many years and we love what we do.
Company NMLS: 365482
948 Garnet Ave
San Diego, California 92109
Phone: (858) 605-0952